Master Blenders Deal Seen Worsening JAB’s Brand Jumble

By Julie Cruz -
Apr 12, 2013

In a dozen years running Reckitt Benckiser Group Plc (RB/), Bart Becht earned a reputation for developing innovative products and pushing them into far-flung regions. Achieving similar success at investment firm Joh. A. Benckiser, where he’s trying to assemble an $11 billion portfolio of second-tier coffee brands, will be a lot tougher.

Becht is buying D.E Master Blenders 1753 NV, a Dutch coffee producer that analysts say has little in common with Peet’s Coffee & Tea Inc. and Caribou Coffee Co., American companies that JAB bought over the past year.

In that respect, JAB’s coffee portfolio resembles its luxury outfit Labelux Group, which manages disparate brands like shoemaker Jimmy Choo and fashion house Belstaff. At stake is Becht’s reputation as a dealmaker and architect of profitable growth in the consumer-products arena.

The firm’s investment approach “makes no sense. It’s really hard to see connections,” said Manfred Abraham, managing partner at retail consultants BrandCap in London. “Bart Becht is a smart man so there must be a reason behind the structure of the portfolio. You can start creating tools that work across companies. I just haven’t seen JAB doing it yet.”

JAB today announced a formal offer for Master Blenders that values the company at about 7.5 billion euros ($9.8 billion). The price of 12.50 euros a share is lower than the 12.75 euros the companies said on March 28 they were discussing. The deal would be the biggest ever in the coffee sector and JAB’s largest purchase to date.

Accounting Errors

After its unsuccessful takeover attempt of cosmetics seller Avon Products Inc. (AVP) last year, closely held JAB can ill afford another misstep. A failure in coffee would be a blow to Becht, who has been on a dealmaking spree since his 2011 departure from Reckitt Benckiser, the consumer-goods company based in Slough, England that’s 10.7 percent owned by JAB. The firm is the investment vehicle of Germany’s billionaire Reimann family, whose fortune comes from a chemical company that evolved into Reckitt Benckiser.

Following years of underinvestment when it was part of Sara Lee Corp., Master Blenders has stumbled since it was spun off in June. Accounting errors were uncovered at the Brazilian business, and Chief Executive Officer Michiel Herkemij departed after only 12 months, leaving Chairman Jan Bennink in charge. In February, the company reduced its 2013 sales and profitability forecasts -- casting doubt on Bennink’s plan to become the world’s No. 2 coffee company.

Digesting Deals

Master Blenders has leading positions in the Netherlands and Belgium, as well as Brazil, the second-largest coffee consuming country behind the U.S. What it doesn’t have is any links to Peet’s or Caribou, which JAB bought for a total of more than $1 billion in separate deals. Both run higher-end coffee houses in the U.S., while Master Blenders is primarily a European purveyor of mass-market java.

“I don’t see any synergies with Peet’s and Caribou,” said Richard Withagen, an analyst at SNS Securities NV. “I don’t know what the master plan is.”

JAB will not combine Master Blenders with Peet’s and Caribou, Becht said in a call with journalists after today’s takeover announcement. “There are no synergies to be had between” the two U.S. companies and Master Blenders, he said.

In a January interview, Becht said he saw synergies between the two American coffee houses, as seen in this week’s decision to convert 88 Caribou outlets into Peet’s locations. JAB’s plan could involve more deals, perhaps for German coffee maker Tchibo GmbH, ING predicts, though Becht in January said he’d like to spend 2013 “digesting” what he’s already gobbled up.

’A Platform’

Becht sees Master Blenders as “a platform” for future acquisitions in coffee and tea, though the company will need “a bit of time” before it gets to new acquisitions, he said in an interview with Bloomberg today. The acquisitions, including in new markets, will “hopefully” come sooner than in three to five years, he said.

JAB’s ambition is to become a challenger to No. 1 Nestle (NESN) SA “over time,” he said. The company is taking a long-term approach of 15 years or more to the coffee companies it is acquiring, the executive said.

The recent stumbles at Master Blenders have led Bennink --a 56-year-old Dutchman not known for patience -- to shake up management. Since December, the heads of the company’s biggest markets, including the Netherlands, Belgium, Spain and France, have been replaced. Some of the new faces have no experience in coffee, having previously worked with Bennink during his stint in the late 1990s at French yogurt maker Danone.

’Consumer Loyalty’

JAB has its supporters. Bernstein analyst Ali Dibadj said Becht and his partners have brought together “great brands in great categories” -- coffee, luxury and beauty.

“Strong brands that have good consumer loyalty are like annuities,” he said. “Their compounding effect is quite attractive financially over long periods of time.”

Becht could help Bennink implement his plan to revitalize the Senseo coffee machine, improve the roast and ground coffee business, and push L’or single-serve capsules into markets like the U.S. New-product development, distribution and marketing were hallmarks of Becht’s tenure as CEO of Reckitt Benckiser, the maker of Nurofen painkillers, Durex condoms and Finish dishwashing detergent.

Under Becht, who led Reckitt Benckiser after it was formed by a merger in 1999, the company’s shares surged more than fourfold, fueled by new products like Cillit Bang grime remover. Those gains far outpaced rival Procter & Gamble Co. (PG) and trounced the FTSE 100 Index. His 2009 pay package included a 90 million-pound ($138 million) gain on share options, most of which he donated to his charitable trust.

As he did at Reckitt Benckiser, Becht still periodically wanders the aisles of grocery stores and coffee shops to keep tabs on shopping patterns and spot trends. “I do believe it is good to understand what is going on,” he said in January..

Next Nespresso

Innovation at Master Blenders could use a jolt --the Senseo coffee machine is a “dusty brand,” said Robert Jan Vos, an analyst at ABN Amro. In a February call with analysts, Bennink called Senseo’s performance “disappointing,” saying the brand doesn’t connect with consumers as well as its larger rival Nespresso, from Nestle. JPMorgan Chase & Co. estimates like-for-like sales in Master Blenders’ third quarter will increase 0.6 percent, the least among European consumer companies.

JAB is focused on the quality of the coffee and innovation, such as the new Senseo Sarista machine, in terms of investment, Becht said. There is room for improvement in the quality of coffee, he said.

Master Blenders’ struggles contrast with the broader coffee industry, which is growing 7 percent annually, data tracker Euromonitor estimates. Starbucks Corp. (SBUX), the coffee-shop operator that competes with Peet’s and Caribou, had a 10 percent revenue uptick in the Americas in its fiscal first quarter. Caribou, whose sales declined 5 percent in its most recent quarter, said this month it is closing 80 locations.

“Premium has been the big change in the coffee market, which was otherwise stagnant in the last few years,” said Xavier Mesnard, a partner at consultants A.T. Kearney. “It’s complicated to be the next Starbucks or the next Nespresso, because they’ve both created a business model. Replicating that is always difficult.”